The Importance of Investing Psychology
Many traders and investors understand the importance of Investing Psychology, but not everyone understands what it is.
Some of the most famous athletes, including Michael Jordan, Tom Brady, and Rory McIlroy, have all consulted psychologists at some point in their careers. People frequently state that a certain sport is 90% mental and 10% physical. Just look at Rafael Nadal’s thorough pre-serve ritual to understand how much he values having a method to reset his thoughts; this is also important when investing.
It is vital to remember that expertise, of course, is quite beneficial in all aspects of investment. For those investors who wish to be more active, remember that you can start trading and investing with a virtual account where you may test things out.
The Downside to Ignoring Investing Psychology
Before we get into some practical strategies for creating some guidelines for your approach, let’s talk about what might happen when you lose control of your investment mindset. People with a poor investment mindset can blow up their accounts, lose all they worked hard for, and make blunders that can have long-term consequences.
That may sound dramatic, but it has happened to people; they let their emotions get the best of them, and the next thing they know, they have lost a significant sum of money. When you ask many successful investors what their best investment was, the majority of them will answer it was taking a losing trade off early. They don’t talk about the winners; they talk about admitting they were wrong even when they wanted to be right because it was the proper thing to do.
Investing Psychology Advice
To be on the correct track towards realising our potential, we must develop a method, understand ourselves, and establish goals. Let’s take a closer look at some practical strategies to advance your awareness of Investing Psychology.
Stick to Your Investing Strategy
First and foremost, concentrate on your approach. Hopefully, the preceding sessions have helped you determine the type of investor you will be. Thus, if you are a long-term investor with a set of guidelines for getting into a position for a lengthy period of time, don’t get sucked into investing in a position for 1 or 2 months because you heard someone talking about how a stock might go parabolic. Even if it does, keep your ‘why’ in mind. A wise man once said that a loss of opportunity is preferable to a loss of capital. Get your method down pat, then rinse and repeat.
Don’t Follow the Crowd
Second, disregard the crowd. Too often, we observe people being swayed by what others say. Whether it’s friends, news, social media, or something else. If your motivation for investing in something hasn’t changed, then be patient and wait for it to play out.
There are excellent resources for information, and there are specialists available to assist, but keep in mind that your investment path is YOURS, not theirs. Just because experts say something doesn’t mean they have the same time horizon as you or would invest in the same manner as you.
This also doesn’t mean don’t listen to the chatter with interest, it just means, don’t jump ship and abandon your ideas and approach with every opinion that comes along.
Diversify Your Portfolio
Third, distribute your risk and diversify your investments. Nothing is worse than putting all of your money into one investment because there is no guarantee that it will only increase in value. Spreading the risk, diversifying, and not putting all your eggs in one basket can make you feel much calmer and allow you to think more clearly.
Don’t Try to be a Psychic, Stick to Psychology
Fourth, don’t feel obligated to exactly time the market. For many investors, dollar-cost averaging can be an excellent strategy to gain market exposure, regardless of cycle or trend.
It can also benefit you psychologically by removing the emotion of being attached to a single price. Instead, you might buy every month, regardless of where the price is trading. If the price declines, you are effectively buying at a reduced price anyhow.
Time is Your Friend
Finally, be patient. We know it’s the most cringe-worthy and cliche saying, but Rome wasn’t built in a day, and neither will your future portfolio. Don’t seek large overnight returns because they rarely pan out. Remember your objectives, design the method, and take your time.
What do the Most Successful Investors Do?
Another thing to remember from a psychological aspect is that the market will do what the market wants to do. A popular saying goes that the market can remain irrational for as long as you can stay solvent.
Additionally, avoid chasing your losses. We will lose investments; that is fine; learn to lose before you can gain. Have a strategy in place and a procedure in place before investing. Make a checklist, and if the investment does not fulfil the required conditions, move on.
The top investors will have a process in place and will follow it diligently. They will resist FOMO, following other investors’ opinions, and searching for a quick buck, and they will not be discouraged by missed opportunities.
Keep a Trading and Investing Journal
When we chat with successful investors, we notice that they have used or continue to utilise a journal at some point. A trading or investment journal can provide you with a wealth of information. It can show you what you excel in and, more crucially, what you excel at the least. It can show you the optimal strategy for you, when you do best, if you are overly cautious or overly hopeful, and so much more.
By writing or typing out your investments, you can obtain accurate statistics on how you perform. These statistics can assist you in developing and refining your approach. Use your strengths. Does Warren Buffet invest in cryptocurrencies with a 15-minute time horizon? No, he plays to his advantages.
Investing Psychology Conclusion
Having guidelines and a plan in place can greatly aid in dealing with the investment from a psychological standpoint. In some ways, you’ve already accepted every possible conclusion. You know where you’re going wrong and where you’re going to be correct. Those that do not have a plan will be on edge the entire time, unsure of what to do.
The truth is that when it comes to psychology, you can fill out all of the surveys and read all of the books in the world, but no one understands you better than yourself. By developing rules and a procedure that work best for you, you should be well on your way to a successful investment career.
Ready to start trading? Open an account now. Need more time? Try a Demo here.
Please make sure to find and follow Defensive Trading on eToro for more trading insight here.
As always, if you have any questions, we would love to hear from you. Please contact us. Happy trading!
Risk Disclaimer: Please remember that this information is for educational purposes only and should not be taken as investment advice, personal recommendation, or an offer of, or solicitation to, buy or sell any financial instruments. This material has been prepared without regard to any particular investment objectives or financial situation and has not been prepared in accordance with the legal and regulatory requirements to promote independent research.
Any references to past performance of a financial instrument, index or a packaged investment product are not, and should not be taken as a reliable indicator of future results. eToro makes no representation and assumes no liability as to the accuracy or completeness of the content of this guide. Make sure you understand the risks involved in trading before committing any capital. Never risk more than you are prepared to lose.